Green Subsidies Aren't Working

Climate change is the greatest new public-spending project in decades. Each year as much as $100 billion is spent by governments and consumers around the world on green subsidies designed to encourage wind, solar, and other -renewable-energy markets. The goals are worthy: reduce emissions, promote new sources of energy, and help create jobs in a growing industry. Yet this epic effort of lawmaking and spending has, naturally, also created an epic scramble for subsidies and regulatory favors. Witness the 1,150 lobbying groups that spent more than $20 million to lobby the U.S. Congress as it was writing the Clean Energy bill (which would create a $60 billion annual market for emission permits by 2012). Government has often had a hand in jump--starting a new -industry—both the computer chip and the Internet got their start in American defense research. But it's hard to think of any non-military industry that has been so completely and utterly driven by regulation and subsidies from the start.

It's a genetic defect that not only guarantees great waste, but opens the door to manipulation and often demonstrably contravenes the objectives that climate policy is supposed to achieve. Thanks to effective lobbying by American and European farmers, the more cost--efficient and environmentally effective Brazilian sugar-cane ethanol is locked out of U.S. and EU markets. Even within Europe, most countries have their own "technical standard" for biofuels to better keep out competing products—even if they are cheaper or produce a greater cut in emissions. Because the subsidies are tied to feedstocks, there is zero incentive to develop better technology.

Both the International Energy Agency and the Organization for Economic Cooperation and Development have asked Germany to end its ludicrous solar subsidies that will total $115.5 billion by 2013. In theory, these subsidies are designed to create viable markets for climate-friendly technology by bringing down production costs, after which subsidies could be phased out. But Germany's solar program has been a textbook case of how subsidies achieve the opposite of their stated intention. As the share of renewable power has jumped from 3 percent in 2001 to 15 percent now, subsidies per -kilowatt-hour of renewable power aren't going down but up, meaning that clean energy is getting more expensive. Energy economist Manuel Frondel of Germany's RWI Institute says the country's lavish subsidies have blocked innovation and delayed the advent of cost-competitive solar power worldwide. For several years solar-module costs stagnated because German subsidies sucked up global production at virtually any price. Only when Spain decided in 2008 to scrap a similar subsidy scheme it had copied from the Germans did the global solar bubble collapse and costs fall. The German solar case also defies the green-jobs model. The idea is that subsidies create a new industry and a lot of high-tech jobs. Yet Germany's solar producers are downsizing. With little pressure to become efficient and cost--competitive, they are now getting crowded out by Chinese producers.

In truth, green tech is no longer the tender niche industry the public debate makes it out to be. Global wind-turbine production alone is already a $50 billion annual market. And just as the bulk of farm subsidies don't go to farmers, but to agro-conglomerates and food giants, it's not small green-tech ventures but big corporations that are getting the best seats on the green gravy train. DuPont, Siemens, power companies, and investment banks are hungry for a slice of the subsidy pie or the new -carbon-trading market. Defenders rightly point out that fossil fuels get a staggering $500 billion in subsidies each year. Yet 80 percent of these are consumer subsidies in a handful of developing countries such as China, Russia, and Iran, and pale in significance when you account for fossil fuels' much higher share of the energy supply. No one denies the necessary role of governments in environmental policy. But of the 10 most cost-effective and measurable ways for the world to cut emissions, for example, subsidies for renewables don't even make it onto the list. Much more effective is putting a price on emissions, or finding other ways to mandate reductions and letting the market decide which technologies are the best. Here's hoping governments take the point soon.